Framework for Forecasting and Policy Analysis System (FPAS) MARK II
Starting from January 1, 2024, the Central Bank of Armenia has been utilizing the Forecasting and Policy Analysis System Mark II, or FPAS Mark II monetary policy framework to achieve its price stability objective. The framework represents a holistic policymaking and institutional setup that evolves several aspects of the original FPAS Mark I, by placing increased emphasis on uncertainties and risk management in monetary policymaking. The vision for developing FPAS Mark II stems from the 2021 CBA Strategy, which outlined the need to have among the best policymaking frameworks in the world. FPAS Mark II was developed at the Central Bank of Armenia, in collaboration with advisors from The Better Policy Project and leading institutions around the world.
The framework introduces a structured and systematic approach to thinking of monetary policy as a risk management exercise along with a framework for implementing policies of least regret. The explicit acknowledgment of uncertainties in the policymaking process, coupled with a fundamental shift in the perception of monetary policymaking from an exercise in expert forecasting to one of risk management, are among the key foundations of the new framework. With FPAS Mark II, the CBA was the first central bank to adopt risk management as a systematic approach to monetary policymaking.
- As a comprehensive, holistic policymaking framework, the FPAS Mark II entails the following changes in how monetary policy is made at the CBA:
- Operational and procedural changes to institutionalize monetary policy as risk management including developing a new policymaking cycle and replacing the baseline scenario with illustrative case scenarios.
- Developing a robust analytical framework and suite of models that includes best-in-class analytical tools (e.g. new quarterly projection model incorporating crucial nonlinearities such as endogenous policy credibility and different satellite models).
- Investments in human capital for continuous improvement in macroeconomic and policy analysis including comprehensive training within a dynamic learning environment, developing a culture of continuous feedback-sharing, and eliminating unproductive hierarchies.
- The highest degree of transparency and accountability, including best-in-class policy communications. To support this, the CBA is introducing a new structure and approach for the monetary policy report and press release, new communications vehicles such as a technical meeting with analysts following each quarterly decision, and greater transparency and accountability regarding the decision-making process.
The key objective of FPAS Mark II is to introduce a best-in-class monetary policymaking framework that allows us to achieve our price stability mandate in a more effective, credible, transparent, and accountable manner. Moreover, having a framework that is explicitly oriented to managing risk and systematically dealing with uncertainty can support better policy decisions and help maintain macroeconomic stability even in times of great turbulence.
We emphasize that the primary objectives of price stability and financial stability are a means to an end. The ultimate purpose of the CBA as an accountable public-sector institution is to improve the welfare of the nation. Achieving low and stable inflation provides a credible nominal anchor for the economy and thereby helps to avoid inefficient boom-bust cycles, stimulates investment, supports the economic development of the country, and improves living standards over time. The best way to achieve these goals is to have a robust, sensible, and comprehensive monetary policy framework in place. In this context, the purpose of FPAS Mark II is to provide the Board of the CBA with a best-in-class framework that can help them make more effective monetary policy decisions in service of the above goals.
- The crises of the early 2020s (Covid-19, the 2020 Nagorno-Karabakh War, and subsequent geopolitical shocks), which highlighted the fundamental role of uncertainty, prompted the leadership of the CBA to reevaluate what constituted an effective framework for implementing and communicating monetary policy under heightened uncertainty. Collaborating with advisors and experts from central banks and institutions around the world, the CBA developed the conceptual foundations for the new framework—FPAS Mark II—in October 2022. We shared these ideas publicly in a working paper and in the Governor’s speech at the International Monetary Fund.
- Between October 2022 and December 2023, the CBA invested important resources in developing the new monetary policy framework. This included designing a new policymaking cycle and approach to policy analysis, developing new analytical tools, prioritizing the training and development of the staff, and creating a new strategy and toolkit for monetary policy communications.
- The FPAS Mark II framework will be implemented at the CBA beginning on January 1, 2024.
е. The Governor’s Talk at the IMF: Risk Management Approach to Price Stability: The Role of Policy Credibility
- Working Papers Published by the CBA Staff :
- FPAS Mark II: Avoiding the Folly in Baselines and Local Approximations
- FPAS Mark II: Better Work-Life Balance Issues
- FPAS Mark II: Monetary Policy-Relevant Output Gaps
- FPAS Mark II: Financial Cycle Output Gaps
- December 2022:
- July 2023:
- FPAS Mark II: Credit Gaps
- FPAS Mark I: Central Bank Transparency and Credibility Measures
- Getting FIT with Imperfect Policy Credibility
- Closed Economy:
- Open Economy:
- Not the Fed Teal Book (Published 8 Times per Year since October 2022)
- October 2023:
- August 2023:
- June 2023:
- March 2023:
- January 2023:
- December 2022:
- October 2022:
g. Central Bank Macro Modeling Workshops, held on a quarterly basis by the CBA since January 2023), have been focused on the intersection of policymaking frameworks with advanced analytical approaches. They have provided a platform for the CBA staff and economists at large to present to and learn from cutting-edge researchers and policymakers globally. Notable speakers and presenters include Charles Goodhart, Eric Leeper, James Hamilton, Marco del Negro, Jacob Frenkel, Werner Roeger, Lawrence Schembri, Robert Ford, Hamid Faruqee, Martin Harding, Michael Kiley, and many others.
h. Weekly Seminars have been hosted by the CBA since mid-2022 with participation from the staff and the Board members of the CBA and other central banks, as well as leading researchers and economists from around the world. This has provided the opportunity to: (1) provide the CBA staff with a platform to present their research and analysis to global audiences of international experts, (2) attend lectures and have discussions with top-tier economists, and (3) provide these experts with an opportunity to critique and contribute to the development of the framework. Notable participants/speakers/commenters at these seminars included Larry Summers, John Taylor, Athanasios Orphanides, Lawrence Christiano, Joseph Gagnon, and many others.
i. Staff and board training courses are held by world-class instructors and experts in their field on a variety of topics including economics, modeling, communications, and more.